Wednesday, August 11, 2010

The US and Taxes

The media in the US saturates that country with an anti-tax rhetoric, so it now has deep roots. The funny thing is that 50+ years ago the highest marginal tax rates were 92% and the country was thriving. Now after 30 years of right wing anti-tax propaganda, the rates are low and the economy is faltering, about to head into a double-dip recession.

Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away. Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed.

I decided to ask some tax experts and political activists where, in the current personal income tax, and particularly in the top tax bracket, they think that Laffer curve peaks -- that is, what that revenue-maximizing rate is. The responses were varied, to say the least. Let's start with the experts.

The Tax Experts

Emmanuel Saez, E. Morris Cox professor of economics, University of California at Berkeley:

"The tax rate t maximizing revenue is: t=1/(1+a*e) where a is the Pareto parameter of the income distribution (= 1.5 in the U.S. and easy to measure), and e the elasticity of reported income with respect to 1-t which captures supply side effects. The most reasonable estimates for e vary from 0.12 to 0.40 (see conclusion page 47) so e=.25 seems like a reasonable estimate. Then t=1/(1+1.5*0.25)=73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes) much higher than the current 35% or 39.6% currently discussed."

Joel Slemrod, Paul W. McCracken Collegiate Professor of Business Economics and Public Policy, University of Michigan:

"I would venture that the answer is 60% or higher.... The idea that we're on the wrong side has almost no support among academics who have looked at this. Evidence doesn't suggest we're anywhere near the other end of the Laffer curve.... The elasticity of response, which is the key parameter here, isn't some absolute parameter that we just have to deal with. It depends on policies. Let me be specific. There's an article about how the IRS has reorganized itself to crack down on tax evasion of high-income people and corporations moving their operations or assets offshore. That's the kind of policy initiative that can affect the elasticity of response by closing up a loophole. You want to raise tax rates at the same time you look at these kind of initiatives.... If we're talking about just deficit variations, we're not talking about what the government spending, the answer is no. It doesn't matter what this response is. If you're not changing government spending, any change in revenue now will have to offset by some change in revenue in the future. If that's the case, then if the responsiveness is high now, it's going to be high later, too."

The Left

Brad DeLong, professor of economics, University of California at Berkeley:

"At 70%."

Dean Baker, co-director, Center for Economic and Policy Research:

"It would be somewhere around 70 percent and possibly a bit higher. It is important to realize that you can have many different rates so we can have only a very small fraction of people actually paying the top rate and even then only on a small portion of their income."

The Right

Larry Kudlow, host, CNBC's The Kudlow Report:

"Personal income tax of 15-20%, business, sales tax rate of 8-10%. I can make some generalizations which would suggest, in terms of just the personal income tax rate, 91% was too high, Reagan cut it to 28.... We've done pretty well in the economy these last three decades, apart from this Great Recession, which is more financial related. Maybe it's a range of 35-40%, it seems like that worked pretty well. If you started encroaching on 50, that would cause trouble.... Once you get into the 40 or 45% range, in my view, you're risking a long-term revenue slowdown and a long-term growth slowdown."

Pat Buchanan, syndicated columnist, former presidential candidate:

Would prefer not to be quoted exactly, but says the revenue-maximizing combined state and federal rate is about 33 percent.

Donald Luskin, columnist, SmartMoney.com, National Review:

"19%... I am saying that the way to maximize the take from personal wage income tax is with a 19% rate on that tax."

The simple fact is that you get what you pay for. If you decide you want to downsize government in favour of extravagant, Gilded Age wealth, you get the fall apart country now called the United States with its low taxes, taxes below that of all other developed economies. If you decide that you want a country with sound civil soceity, where hope and opportunity are offered to all, then you have a tax rate closer to the 92% that it was under Eisenhower in the mid-1950s.

The economy was stronger, grew more, and had a better income distribution in the 1950s and 1960s. But since the "Reagan Revolution" the taxes have been lower, economic growth weaker, and the distribution of income more lop-sided. When will the American people stop drinking this Kool-Aid?

Actually I need to be corrected. The infamous Jonestown murder/suicide was a metal vat with Flavor Aid, poisoned with Valium, chloral hydrate, cyanide, and Phenergan according to Wikipedia. But point remains, the Republicans have been destroying the US from within by selling their "government is the problem, not the solution" and "deregulate, deregulate, deregulate" and "trickle down tax cuts".